By Brian Giuliano
Brandywine Global Investment Management, a specialist investment manager of Franklin Templeton
Flexibility and adaptability can work to an investor’s advantage in the challenging fixed income markets of 2021. Structural disinflationary trends are now clashing with cyclical inflationary forces in a global economy struggling to recover from the COVID-19 pandemic. Add on interest rates at record lows, demographic pressures, heavy government debt levels, and widespread technological disruption throughout the global economy.
The market environment of low interest rates makes it difficult to generate income while preserving capital. As a result, many investors have taken on additional credit or interest rate risk to try to earn a more attractive income from fixed income assets.
But there are pitfalls to this approach. Without a counterweight to the extra portfolio risk, investors could be vulnerable to an increase in interest rates or a selloff in credit markets.
One option for investors is a multisector strategy with the flexibility to adapt quickly to changing markets. A strategy that’s able to capture opportunities when available but also play defense when market conditions call for it.
Global Income Optimiser strategy
The portfolio team behind the Franklin Brandywine Global Income Optimiser strategy are strong believers in flexibility, which means we try to adapt the income and risk exposures in a portfolio to the market environment. This approach does not have any structural, home country or sectoral biases. We aim to rotate the portfolio across what we believe are the best risk-adjusted return opportunities in the global fixed income universe.
Our goal is to generate high-yield-like returns with investment-grade-like volatility for investors. We want to maximize the income that can safely be earned in a given market environment.
The Franklin Brandywine strategy seeks returns from across the investment universe, including global investment grade and high yield credit, developed market sovereigns, structured credit and emerging market debt. Furthermore, sector rotation, duration management, quality rotation and security selection are employed to meet the strategy’s investment objective. Foreign currency is hedged primarily back to an investor’s base currency, such as the Canadian dollar; however, limited exposure may be used opportunistically to add alpha for a portfolio.
This strategy became available to retail investors in Canada on June 4, when Franklin Templeton introduced the Franklin Brandywine Global Income Optimiser Fund*. Globally, the strategy has a successful track record, dating back to its inception in 2013. In the U.S, a similar fund, to the degree allowed by Canadian regulations, is 5-star rated by Morningstar.** Brandywine Global is a specialist investment manager that was part of Franklin Templeton’s acquisition of asset manager Legg Mason in 2020.
Portfolio positioning for the reopening
Brandywine Global sees growth and inflation returning to the global economy this year. We increased spread duration late in the first quarter of 2020 and began reducing high quality government bond duration; so overall portfolio duration was roughly flat last spring. From last summer through winter, we materially reduced portfolio duration.
Now, the positioning of the strategy is for a short duration, cyclically-oriented portfolio of companies that have some pricing power, given inflationary pressures from the reopening trade. There’s a mix of U.S. and European names with a concentration in the BBB and BB space. The level of credit risk is largely investment grade over the long term; less than 5% of the portfolio is in CCC securities. High quality government bonds can help manage volatility. These and other ‘safe’ assets offer lots of ‘episodic value’ for the portfolio at times, especially during volatile markets, by being sources of alpha and acting as a counterweight to riskier holdings.
Capital protection is a top priority, and the Brandywine team will not reach for yield in this strategy.
Environmental, social, governance assessments
Also, Brandywine Global integrates ESG analysis into our comprehensive assessment of information risk and price risk with this strategy. The focus is on the material ESG issues that can impact a country’s economic growth, the business activities of a corporation, or the integrity of securitized collateral.
This approach provides a framework for evaluating ESG factors, including improvements or deterioration in factors over time, comparisons against sovereign or industry peers, and how a risk or opportunity is being addressed. The fund’s European version earned an EU Sustainable Finance Disclosure Regulation Rating of Article 8, which means it has binding environmental and social characteristics.
Canadian investors can access this strategy’s adaptability and its geographic, quality, and sector flexibility through the Franklin Brandywine Global Income Optimiser Fund, which is designed to be an all-weather fixed income solution with a value-oriented approach. An ETF version, Franklin Brandywine Sustainable Global Income Optimiser Active ETF (TSX: FBGO), will be available on or around June 29, 2021.
Let flexibility and adaptability work to your advantage.
Brian Giuliano , CFA, is Vice President, Portfolio Management for Brandywine Global Investment Management, Philadelphia, PA. In his role on the Global Fixed Income team, Brian provides research and communicates with clients, prospects, and consultants in support of our investment strategies. Previously, as a senior investment specialist in Brandywine Global’s Wealth Management Group, he maintained and enhanced relationships with institutional and high net worth clients and prospects while specializing in Global Fixed Income and related strategies. Prior to joining the Firm in 2008, Brian was a marketing and client service associate at Mondrian Investment Partners (U.S.), Inc. (2005-2008). Brian is a CFA® charterholder, holds FINRA Series 3, 7, and 63 licenses, and earned a B.A. in Business Administration from Loyola University Chicago. He is a member of the CFA Institute and the CFA Society of Philadelphia.
Since 1986, Brandywine Global has provided investment insights and a range of differentiated fixed income, equity and alternative solutions to clients worldwide. Brandywine Global, a specialist investment manager of Franklin Resources, Inc., manages approximately US$62 billion in assets under management as of March 31, 2021, with headquarters in Philadelphia and offices in Montreal, Singapore and London.
* Effective June 4, 2021, Brandywine Global Investment Management, LLC (“Brandywine”) replaced Franklin Advisers, Inc. as the sub-advisor to Franklin Brandywine Global Income Optimiser Fund (formerly Franklin Strategic Income Fund) and Franklin Bissett Investment Management is no longer a portfolio advisor to the Fund. Effective June 4, 2021, Franklin Strategic Income Fund has been renamed Franklin Brandywine Global Income Optimiser Fund. The investment objective of the fund remains the same. Certain investment strategies have changed. For further details, please refer to Amendment No.4 to the Simplified Prospectus for the fund, dated May 3, 2021, from franklintempleton.ca.
Brandywine Global Investment Management, LLC, is a wholly-owned subsidiary of Franklin Resources, Inc.
Franklin Brandywine Global Income Optimiser Fund shares the investment strategy and management as the Legg Mason Brandywine Global Flexible Bond Fund, a USD$80.9M, ★★★★★ Morningstar rated fund with a five-year track record in the U.S.
** The Morningstar Rating™ for funds, or “star rating”, is as of March 31, 2021 and is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history, and subject to change monthly. Current monthly ratings can be found at leggmason.com. Exchange traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total return, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10- year rating/30% five-year rating/20% three-year rating for 120 or more months of total return. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Ratings do not take into account the effects of sales charges and loads. Class A, I and IS shares of the Fund were rated against 291, 260, and 140 Multisector Bond funds over the 3-, 5- and 10-year periods, respectively. With respect to these funds, Class A, I and IS shares of the Fund received Morningstar Ratings of 5, n/a, and n/a; 5, n/ a, and n/a; 5, n/a, and n/a stars for the 3-, 5- and 10-year periods, respectively. Ratings shown are for the highest and lowest rated share classes only, when available. Morningstar Rating is for the specified share class(es) only; other classes may have different performance characteristics. A 4- or 5-star rating does not necessarily imply that a fund achieved positive results for the period.
This commentary is for informational purposes only and reflects the analysis and opinions of the Franklin Bissett Investment Management fixed income team as of May 17, 2021. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The commentary does not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.